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Chinese Telecoms Open U.S. to Spying

Huawei Technologies Co. and ZTE Corp., China’s two largest phone-equipment makers, provide opportunities for Chinese intelligence services to tamper with U.S. telecommunications networks for spying, according to a congressional report to be released today.

The House intelligence committee report says the two companies failed to cooperate with a yearlong investigation and to adequately explain their U.S. business interests and relationship with the Chinese government, according to a draft provided by the panel.

“Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems,” says the report from the committee’s chairman, Michigan Republican Mike Rogers, and its top Democrat, Maryland Representative C.A. “Dutch” Ruppersberger.

The House investigation found “credible” reports of illegal behavior by Huawei, including immigration violations, bribery and corruption, based on statements from current and former employees, according to the report. Allegations will be referred to federal agencies including the Homeland Security and the Justice departments, according to the report, which didn’t provide full details or identify the accusers.

Suggestions that Huawei “is somehow uniquely vulnerable to cyber mischief” are baseless, William Plummer, a Washington-based spokesman for the company, said in an e-mail. These “ignore technical and commercial realities, recklessly threaten American jobs and innovation, do nothing to protect national security, and should be exposed as dangerous political distractions,” Plummer said.

David Dai, a Shenzhen-based spokesman for ZTE, said the company couldn’t comment until after seeing the full report. He supplied a letter the company provided to the committee on Sept. 25 that stated ZTE is neither owned nor directed by China’s government or the Chinese Communist Party.

“ZTE is committed to provide maximum cybersecurity through transparent, comprehensive, and continuous standards-based assessments of ZTE software, firmware, and hardware,” the company said in the letter.

ZTE shares fell 6 percent to HK$12.60 at the close of Hong Kong trading, the biggest decline since Aug. 27. The stock has lost 48 percent this year, compared with a 13 percent gain for the benchmark Hang Seng Index.

‘Economic Espionage’

Rogers and Ruppersberger announced the probe of the Chinese companies last November, citing concerns about hacking into U.S. systems and theft of intellectual property. U.S. counterintelligence officials called China the world’s biggest perpetrator of economic espionage in a report last year, saying the theft of sensitive data is accelerating and jeopardizing an estimated $398 billion in U.S. research spending.

“Private-sector entities in the United States are strongly encouraged to consider the long-term security risks associated with doing business with either ZTE or Huawei for equipment or services,” the report says.

The U.S. Congress should end its prejudice against Chinese companies and do more to promote trade, Foreign Ministry spokesman Hong Lei said at a briefing in Beijing today.

“Chinese telecommunications companies have conducted their international operations based on market-economy principles,” Hong said. “Their investments in the U.S. reflect the mutual benefits brought about by U.S.-China trade relations.”

Internal Huawei documents supplied by a former employee showed the company provides “special network services” to an entity the former employee believes is an “elite cyber-warfare unit” within the Chinese army, according to the report. The documents “appear authentic” and suggest Huawei officials weren’t forthcoming about research and development on the military’s behalf, the report says.

The report describes a series of meetings between the panel’s members and representatives of the two companies.

Ruppersberger and Minnesota Republican Representative Michele Bachmann were among those who met in Hong Kong last May with Ren Zhengfei, Huawei’s founder and chief executive officer. Ren founded Huawei in 1987 after leaving the Chinese army, and his military ties have been a focus of attention by U.S. lawmakers.

Executives for Huawei and ZTE, both based in Shenzhen, China, denied links to Chinese espionage at an intelligence committee hearing last month, saying they aren’t controlled by China’s government. The companies said they favor independent audits of technology vendors’ hardware and software as a way to ensure that devices and networks are secure.

Market Roadblocks

The report’s conclusions may create more U.S. roadblocks for the Chinese companies in the U.S. market.

Huawei has backed away from business deals after U.S. objections, dropping a bid with Bain Capital Partners LLC to buy computer-equipment maker 3Com Corp. in 2008, and unwinding the purchase of patents from a computer-services company, 3Leaf Systems Inc., last year. The U.S. Commerce Department last year barred Huawei from participating in a nationwide emergency network, citing security concerns.

The U.S. Committee on Foreign Investment in the U.S., an interagency panel that reviews acquisitions of domestic companies by non-U.S. entities, should block acquisitions involving Huawei and ZTE because of security threats, the intelligence committee report says.

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